Monday, August 9, 2010

Notes on economic strategy

Here is some food for thought. This perspective is not new. But, it bears repeating. The Western world is now in an era where austerity and fiscal prudence writs large out of necessity.

As Western thinkers and commentators sift through the charred landscape of capital market and financial excess, their perspectives are instructive to us in Malaysia. We must never stop learning. I have taken the liberty to make some formatting edits on this extract from the Economist to emphasise some matters that I believe to be important:

In the rich world, meanwhile, the record shows, again and again, that industrial policy doesn’t work. The hall of infamy is filled with costly failures like Minitel (a dead-end French national communications network long since overtaken by the internet) and British Leyland (a nationalised car company). However many new justifications are invented for the government to pick winners, and coddle losers, it will remain a bad old idea. Thanks to globalisation and the rise of the information economy, new ideas move to market faster than ever before. No bureaucrat could have predicted the success of Nestlé’s Nespresso coffee-capsule system—just as none foresaw that utility vehicles, vacuum cleaners and tufted carpets (to cite examples noted by Charles Schultze, an American opponent of state planning) would have been some of America’s fastest-growing industries in the 1970s. Officials ignore the potential for innovation in consumer products or services and get seduced by the hype of voguish high-tech sectors.

The universal race to create green jobs is the latest example. Led by China and America, support for green tech is rapidly becoming one of the biggest industrial-policy efforts ever. Spain, blinded by visions of a solar future, subsidised the industry so lavishly that in 2008 the country accounted for two-fifths of the world’s new solar-power installations by wattage. This week it slashed its subsidies, but still has a bill of billions.

Not all such money is wasted, of course. The internet and the microwave oven came out of government-led research; the stranger stuff that governments do can prove surprisingly successful. A few governments, such as America’s and Israel’s, have contributed usefully to the early development of venture-capital networks. Some advocates of industrial policy argue that the government, like a pharmaceutical company or a seed-capital firm, should simply increase the number of its bets in order to raise its hit rate. But that is a cavalier way to behave with taxpayers’ money. And the public funds have an odd habit of flowing towards politically connected projects.

Fortunately, there are now some powerful constraints on governments’ ability to meddle. In an age of austerity they can ill afford to lavish money on extravagant industrial projects. And the European Union’s competition rules place some limits on the ability to do special favours for particular firms.

That points to the first of three ideas that should guide a more sensible approach to securing the jobs of the future.

Straightforward steps to improve the environment for business—less red tape, more flexible labour markets, simpler tax and bankruptcy regimes—will be more effective than handouts to favoured firms or sectors. Europeans ought to be seeking to strengthen the rules of their single market rather than pushing to dilute them; a long-overdue single European patent process would be a good start. Competition will do far more for jobs than coddling.

Second, governments should invest in the infrastructure that supports innovation, from modernised electricity grids (a smarter way to help green energy) to basic research and university education. The current fashion for raising barriers to the inflows of talented researchers and entrepreneurs hardly helps.

Third, rather than the failed policy of picking winners, governments should encourage winners to emerge by themselves, for example through the sort of incentive prizes that are growing increasingly popular.

The example of Minitel as a costly failure is interesting - it was an excellent system which provided an Internet long before most people had heard of the Internet, and it was so succesful I am pretty sure that it made a small fortune for its sponsors. If that is an example of a costly failure of government intervention in industry, I would like to see the success stories!